YOUR MONEY | INVESTING 201

Putting Your Money Where Your Morals Are Can Be Right Financially

This is the fifth installment in Investing 201, a 10-part series that looks at changes in the investing landscape that have occurred during the last few years. Lesson 5 focuses on "socially responsible" investing. Next week: Picking mutual funds.

In the beginning, there was a guiding principle: Thou shalt not make money from industries that do harm.

From this sprung a small cadre of so-called ethical investors. Primarily well-heeled religious folk, ethical investors followed their creed by sidestepping investments in tobacco, alcohol and gambling companies. In the 1960s and '70s--during the Vietnam War--the movement expanded to add agents of war, such as manufacturers of guns and bombers and nuclear weaponry, to their list of "shalt-nots." And they quietly clicked along, secure in the knowledge that even though they couldn't change the world, ethical investors could at least sleep knowing that their money was not being used to do harm.

A cry for help changed everything.

Bishops of the Anglican church in South Africa appealed to their brethren in the American Episcopal church to help them end apartheid. When a decade of quiet urging proved fruitless, the ethical investors got more boisterous and started enlisting powerful allies, including managers of multibillion-dollar pension funds and city and state treasurers.

When they flexed their collective muscle by divesting themselves of investments in companies doing business in South Africa, that country's economy went into a tailspin. Suddenly, the white minority government sat down to bargain with the black majority, which helped lead to a complete change in their system of government. And it changed this segment of the investment market forever.

"It was a watershed period," says Amy Domini, author of several books on the topic and founder of Domini Social Investments in New York. "Until then, we called ourselves 'ethical' investors because we didn't want to imply that what we were doing was going to make a difference. It turned out that we could be a part of the solution."

It's now less than a decade later, and ethical investing has been renamed "socially responsible" to reflect the industry's newfound power and tactics. Now, instead of sidestepping companies with questionable track records, some social funds will invest in these companies to press for change. They're not just looking at "sin" stocks anymore, either. They're involved in an array of environmental and employee relations issues, from sustainable logging to sweat shops and the treatment of women in the workplace.

The long-held belief that investing with your heart will pinch your pocketbook has proved a myth. A recent study from the Washington-based Social Investment Forum found that 70% of the nation's largest socially screened mutual funds outperformed their non-screened peers in 1998.

"The thought was that if you invested socially, you sacrificed return. But, in fact, you can win, lose or draw just like anyone else," says Tim Grant, president of the Pax World Fund family in New York, which uses social screens. "We've gotten a market return. There are some funds that are winning, some are losing and some are in the middle."

Adds J.B. Miller, national sales manager for the MMA-Praxis mutual funds: "Our portfolio managers say that poor performance is not a result of the social screens; it's a function of poor stock selection."

And Domini Social Equity Fund, an index fund of 400 companies that have passed social screens relating to their lines of business and their employment practices, beat the Standard & Poor's 500 index on the basis of one-year, three-year, five-year and since-inception (in 1991) returns, through this year's first quarter. That's a feat few other funds--socially screened or not--can meet.

The social investment movement is growing rapidly. From 1995 through 1997, assets in socially screened portfolios surged 227% to $529 billion from $162 billion, according to the Social Investment Forum.

But individual investors who want to get involved in social investing might want to do a little soul searching first, Miller says.

"I would ask myself, 'What are those things that I value?' " he says. "Are there things that you would feel totally uncomfortable with if you found them in your portfolio?"

You then need to consider whether your ethical and social concerns are addressed by a mutual fund, or whether your concerns are so specific that you ought to invest in individual companies.

Almost all social funds screen out investments in "sin" stocks--companies that produce and sell alcohol and tobacco or facilitate gambling. Most also avoid defense contractors and gun manufacturers. Some avoid the purveyors of nuclear power. Many use "positive screens" to buy into companies that appear to have progressive work practices or particularly good environmental records. However, few have looked at other tricky issues, such as animal testing. And their positions on issues such as the environment, for example, can vary.

However, there is now nearly universal agreement that social investing can make a difference.